MCAs: Are They Right For Your Business?

January 25, 2024


If your small company has cash-flow issues, like many, you may be considering a merchant cash advance (MCA).

New company owners with limited business experience or poor credit ratings might benefit from an MCA. If you cannot get a regular small business loan, this may work. There are several major drawbacks to this alternate funding method. 

What’s MCA?

MCAs are different from small-business loans. You repay the lender with a share of your firm’s future sales. MCA lenders apply a factor rate to your financing amount to determine a fixed payback amount.

Short repayment periods—three to 18 months—are usual. Short payback duration and high factor rates result in high APR. A merchant cash advance has a substantially higher APR than a small-business loan or credit card. Unlike a regular company loan, which charges interest on outstanding principal, early repayment has no incentive since the payback amount is predetermined.

MCAs (Merchant Cash Advances) can be a great option for businesses that need access to fast capital for problems like cash-flow shortages. short-term expenses, etc. However, this type of financing can be quite expensive for the concerned business. This is because these types of financing contain triple-digit annual percentage rates and hence can lead to a difficult debt cycle.

Hence, you can see that MCAs should be your last option for small business loans. Before the option for an MCA, make sure you go through other small-business loan options.

How Do MCAs Work?

On the first hand, you must understand that an MCA is not a typical loan. However, it still provides your business to fulfill your requirement for a large amount of capital. But, in this case, the loan provider is taking part in the profits of your future sales, and you will need to use your future sales to repay the capital. Furthermore, you will also need to pay the loan fee along with it.

You can compare an MCA loan with invoice financing. In the latter case, you are borrowing a loan against future invoices for cash exchange.

Generally, one can repay merchant cash advances (MCAs) in two ways:

Percentage Of Sales

This is the traditional way with which MCAs work. In this case, the cash-advance provider automatically deducts a percentage of your debit card or credit card sales on a daily/weekly basis. This goes on until your advances are full.

Hence, you can see that MCAs do not have any repayment terms that you might see with other loans. Here, the period of repayment depends on your percentage of sales and can range between three to eighteen months.

Fixed Bank Withdrawal

Another type of repayment option for MCAs is that the loan provider withdraws funds directly from your business account. Here, you are repaying a certain amount daily/weekly from your business account, regardless of what sales your business makes. Furthermore, the amount of repayment is based on your monthly revenue estimate.

One of the good things about this repayment structure is that you can calculate how long it will take for you to pay back the capital amount. The repayment amount each time depends on the amount you borrowed. However, this structure is the best for those businesses that do not fully rely on debit and credit cards for sales.

Qualification requirements

Qualification requirements for MCAs are simpler than for regular small-business loans, with a lower credit score requirement. Simple application, speedy approval. Apply for an MCA online. Name, contact information, business information, bank or credit card processing statements, and business tax filings are frequently required.

  1. Funding speed

Your bank account may get MCA money in 24 hours after approval.

  1. No collateral needed

The agreed-upon proportion of your future sales will be your only security, unlike a standard company loan. 

  1. Repayment schedule

Three to 18 months are common payback periods. The holdback amount deducted from future sales may trap your organization in debt. Since your payback is a proportion of sales, slower periods have smaller repayments. 

  1. No credit bureau reporting

Your ability to pay on time may make or break this. Business credit scores won’t rise with on-time payments. However, a bad payment history won’t affect your credit. 

  1. High repayment APR

MCAs have a higher APR than small-business loans because of their high factor rate. Some corporate credit cards have better rates than MCAs. 

  1. No early repayment rebate

Early repayment is pointless since the total amount is set. Repaying your MCA early does not reduce your debt, unlike a small-business loan, which is dependent on your balance.

  1. No regulation

MCAs are not federally regulated since they are purchases of future sales, not loans. They are exempt from state usury regulations and federal Truth in Lending Acts.

Merchant Cash Advance (MCA) Rates

MCA companies mainly charge fees as factor rates instead of traditional interest rates. Here, the factor rate ranges between 1.1 and 1.5. The variation of the rates depends on how the capital provider assesses your business.

The following are some of the major factors that providers check for assessing factor rates:

  • The industry where your business works
  • Years in business
  • Your debit and credit card transactions
  • Personal credit score and more

Businesses that have a lower ability to repay the MCA will get a higher factor rate. As a result, the business ends up paying higher business fees.

Who benefits from MCAs?

Small company owners with little experience benefit from MCAs. If you have bad credit, it may be your only choice. If your seasonal company needs cash immediately in a quiet month, an MCA may be a viable alternative since you may return the capital with future sales from your busy months.

When is MCA a good option?

If you need money urgently and fit the aforementioned criteria, an MCA may be preferable. The application and financing procedure are speedier than a traditional small-business loan. 

MCA alternatives

There are numerous better MCA options if you have a long company history and strong credit.

  • Business loans

Consider a small business loans Georgia if you have enough company experience and good credit. This alternative has better rates than an MCA if you don’t need cash right away. You may apply for many small-business loans online.

  • Business credit cards

Businesses in need of money urgently might use a business credit card. If you qualify, small-business credit cards are cheaper than MCAs despite their hefty rates. 

  • Invoice factoring

Invoice factoring may benefit companies with substantial accounts receivable balances. It lets you sell receivables for cash at a discount. Cashing out soon is fantastic, but you won’t get your accounts receivable value.

Use MCAs as a last option

MCAs should only be utilized as a last alternative for finance because of their hefty costs. In a cash-flow crisis, this may be your greatest alternative if you don’t qualify for company loans or credit cards. MCA repayments come from future sales and may cause a debt cycle.

Mony Shah

With an adept skill of curating content on multiple genres, Mony has harnessed success as a Content Writer quickly. Find her sharing profound thoughts and opinions on finance, insurance and lifestyle niches.

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